China PMIs impress but analysts warn of risks ahead

An uptick in Chinese manufacturing activity in August has eased slowdown fears, but analysts have flagged concerns about the quality of growth and say growth momentum could slow in the fourth quarter.

Data on Monday showed China's final HSBC purchasing managers' index (PMI) for August was unchanged from the flash figure of 50.1 and up from an eleven-month low of 47.7 in July, continuing the positive tone set by China's official PMI figure out over the weekend, which showed factory activity expanding to a 16-month high of 51 in August up from 50.3 in July.

Despite the strong improvement in both indices, analysts told CNBC the positive momentum might not last for long.

"Despite the official PMI being at a 16-month high, it is still only merely 51. We do not expect a sustained period of recovery or acceleration in growth in the coming quarters," said Jian Chang, chief China economist at Barclays on CNBC's "The Call" on Monday.

"One thing to keep in mind in the medium term is that the fundamental challenges facing the Chinese economy have not changed," she said, referring to a plethora of headwinds faced by China's industry including overcapacity, rising labor costs, and the risks from a frothy property sector and concerns over the state of the banking sector.

"We do expect the year on year growth may slow down in the fourth quarter," added Chang.

PMI data shows China as stabilizing factor

Jian Chang, Chief China Economist at Barclays dissects HSBC's final reading of Chinese factory activity for August. Despite the good data, she expects annual growth to slow by year-end.

Worries over slowing growth in China have escalated this year with many economists seeing growth falling as low below as 7 percent for the full year.

But positive data in recent weeks has helped fuel hopes that growth is stabilizing. Several investment banks have raised their third-quarter growth forecast, including JP Morgan, which has now hiked its forecast for the third quarter to 7.6 percent from 7.4 percent.

While analysts acknowledge signs of stabilization in the economy, they aren't convinced of the momentum.

"The quality of the recovery is still pretty poor... and it remains to see whether the recovery can last into the fourth quarter this year," said Shen Minggao, Citibank's chief economist for China, His forecast was China's growth is for an annualized 7.4 percent growth in the third quarter, and 7.1 percent in the fourth.

Shen flagged two concerns about the recent PMI data; one, that the recovery seemed to be led by larger firms and less so by the small-and-medium-sized companies, and secondly, that liquidity seems to be getting scarce, which could damage growth.

"The liquidity is getting tighter. When larger firms start to invest they are sucking in more liquidity and crowding out credit for small and medium sized firms and the consumer, without further liquidity easing the rebound could be limited," he added.

Jim McCafferty, managing director and co-head of equity research at CIMB Securities, told CNBC he was concerned the recent pickup in growth was fueled solely by the recent mini-stimulus measures rather than an improvement in domestic demand.

"What we need to see happening in China is growth moving away from government-led growth towards domestic consumption," he said.